The Kona Files

How an obsession with leaks brought scandal to Hewlett-Packard.

According to Patricia Dunn, “Tom’s view of corporate governance is that a few people—he and Jay—should make the decisions and everyone else is a spear-carrier.”

Mark Ulriksen

Leaks are inevitable in business and politics, but as acts of defiance they are maddening to those who prize order and control. At Hewlett-Packard, under the tumultuous stewardship of Carly Fiorina, the country’s most visible female chairman and C.E.O., unauthorized disclosures to the press became a particular problem. In February, 2005, Fiorina was fired. A series of damaging leaks preceded her firing, and the selection of her replacement as C.E.O., Mark Hurd, was almost derailed by disclosures to Business Week. Patricia Dunn was appointed chairman of the board, with a mandate to insure that this kind of thing was stopped. So when Dunn opened an e-mail from the company’s head of public relations, in January of 2006, that included an article from CNET’s technology-news Web site entitled “HP Outlines Long-Term Strategy,” she read it with dismay.

The story, by Dawn Kawamoto and Tom Krazit, was an inside account of the company’s retreat, held two weeks earlier, at the Esmerelda Resort & Spa, in Indian Wells, California. The reporters quoted an unnamed source within the company as saying, “By the time the lectures were done at 10 P.M., we were pooped and went to bed.” The article went on to discuss the managers’ thinking about AMD vs. Intel chips, new sales strategies, and possible acquisitions. Clearly, someone at the retreat, which was attended only by board members and top executives, had leaked proprietary information. Dunn had overseen an earlier, unsuccessful effort to identify the source of the articles about Fiorina; this time she was determined to get to the bottom of the problem. She e-mailed the CNET article to the board, including its most powerful member, the seventy-four-year-old venture capitalist Tom Perkins:

Tom, this will disturb you as much as it disturbs me. For our discussion.

Break out the lie detectors.

Regards, Pattie

Tom Perkins’s role in the rise of Silicon Valley cannot be overstated. David Packard, who, with Bill Hewlett, founded Hewlett-Packard in a Palo Alto garage in 1939, hired Perkins in 1957, at a time when the company was entering a period of rapid expansion, and Perkins was put in charge of the research labs. Packard also allowed Perkins to develop his own laser business on the side; he made his first millions when he sold it to SpectraPhysics, in 1970.

Hewlett-Packard’s initial push into the nascent world of computers did not come until 1966, and began inauspiciously—the first model was not a success. The partners decided to put Perkins in charge of the computer division. He created a specialized sales force, and computers eventually became the largest segment of the company’s business. When Packard left to serve as Deputy Secretary of Defense in the Nixon Administration, Perkins became Bill Hewlett’s special assistant. By 1971, when Packard returned from Washington, Hewlett-Packard’s revenues were around $500 million. (Today, they exceed $90 billion.) Perkins then left to launch his own venture-capital firm. One of his first spectacular successes was Genentech, the biotechnology concern.

Since then, Perkins and his firm, Kleiner Perkins Caufield & Byers, have provided the seed capital for numer-ous technology startups that have gone on to sell shares to the public—including Amazon, Sun Microsystems, and AOL—culminating in the public offering of Google, in 2004. Perkins acted as a mentor to many of Silicon Valley’s most prominent entrepreneurs and chief executives, among them Eric Schmidt, Jim Clark, and Jeff Bezos. He has become enormously wealthy. He owns a Norman-style mansion in Belvedere, in San Francisco Bay; a medieval manor house, with a moat, in East Sussex; and the world’s largest private yacht, the two-hundred-and-eighty-nine-foot Maltese Falcon.

Tall, tan, fit, graying at the temples, Perkins looks the part of a billionaire captain of technology and industry. He is an avid sailor, a fast-car enthusiast—he owns a Porsche Carrera GT, a McLaren F-1, and a Bugatti EB 110—and a wine connoisseur with a widely admired collection of Napa Valley reds. After divorcing his second wife, the romance writer Danielle Steel, in 1999, he began writing himself, and embarked on a novel about the amorous exploits of a rich financier much like him.

When Perkins received Dunn’s e-mail and the Kawamoto article, he responded within the hour:

Pattie: This is incredible! I can’t believe that this has happened again. But, in reading it, I don’t think it damages the company too much—it’s just that this news should come from us when we want it to, and not when it is leaked.

I doubt if this came from a board member. Frankly, I don’t think a board member would have remembered this much detail. . . . I think Mark must put the fear of God (i.e. fear of Mark Hurd) . . . to stop this.

Dunn and other board members felt that the source needed to be found. Perkins says he told Dunn, “Well, I agree it’s bad. But the CNET article itself is benign.” Perkins says Dunn insisted that the leak was serious: “ ‘It’s about strategy!’ ”

Perkins doubted that anything would come of the article, and although he had helped to orchestrate Dunn’s appointment as board chairman, the previous year, he says that he was now beginning to feel that there was little about which he and she agreed.

Patricia Dunn, who is fifty-three, was invited to join the Hewlett-Packard board in 1998. In many ways, Dunn told me recently, she felt that she had been invited because she happened to be the right person at the right time—a woman with financial and managerial expertise, familiar with emerging public issues of audit independence, accountability, and inclusiveness in corporate governance.

Unlike many other board members, whose backgrounds were in Silicon Valley, and who had graduated with science degrees, Dunn grew up in Las Vegas, when it was still a dusty, remote desert resort. Her mother had been a model and showgirl, and her father was the entertainment director at the Dunes and Tropicana Hotels. He died when Dunn was eleven. Dunn had hoped to become a journalist, but the family was so poor that, after graduating from U.C. Berkeley, which she attended on scholarships, she took a job as a secretarial assistant at Wells Fargo Investment Advisors. She was quickly given more responsibility, and eventually rose to become the firm’s co-C.E.O. She met her husband, Bill Jahnke, there. In 1996, Barclays bought the business, and in 1998 she was named sole global C.E.O., eventually becoming the principal fiduciary for more than a trillion dollars in assets—the guardian of “other people’s money,” as she put it, money entrusted to Barclays by foundations, endowments, and giant pension funds. Dunn developed an interest in corporate governance, a term that technically refers to all aspects of running a corporation but in recent years has come to emphasize issues of fairness, transparency, and accountability. Dunn has said of herself, “There has never been a whiff of scandal or taint related to my activities, particularly any issues concerning my integrity or ethics. Indeed, in the roles I have held, any such taint would be an instant career-ender, and for good reason.”

Although Dunn was based in San Francisco’s financial district, her primary business contacts were not in Silicon Valley but with institutional investors, including pension-fund managers. At first, her role on the Hewlett-Packard board, where she sat on the audit committee, was a quiet one. She tended to say little at meetings, trying to grasp the dynamics of the board’s strong alliances and outsized personalities, including the nuclear physicist George A. (Jay) Keyworth, the board’s longest-serving member. Keyworth, like Perkins, had been close to Packard. He had also run the physics division at the Los Alamos National Laboratory and, as the President’s Science Adviser in the Reagan Administration, was a principal architect of Reagan’s “Star Wars” nuclear-missile-defense-shield program.

In July of 1999, the Hewlett-Packard board chose Carly Fiorina, a senior executive at Lucent, to be its C.E.O. As the first woman and first outsider to head a huge Silicon Valley institution, Fiorina received enthusiastic press coverage_._ Her good looks and her stylish attire drew attention, as did her appearances at high-profile events like the Academy Awards, the opening of the Mission: Space attraction at Disney World, and the World Economic Forum, in Davos, Switzerland. “She was a Hollywood-class icon,” Keyworth says.

In 2001, Fiorina decided that Hewlett-Packard should acquire Compaq Computer, one of its rivals—a move that Keyworth and Dunn supported. Some board members, however, and heirs of Hewlett and Packard objected, and mounted a costly, divisive public campaign to stop the acquisition. At one point during this battle, the P.R. department put Jay Keyworth, who lived in Santa Fe, in touch with a number of journalists, including Dawn Kawamoto, by telephone, and furnished him with talking points:

Please transition to Carly and her skill set. Specifically, her brilliant strategic mind and her confidence—illustrated by her deep engagement of the board. . . . This is an opportunity for us to reset Carly’s image to show the Carly we all know and love.

Although the effort to acquire Compaq was successful, Fiorina subsequently struggled to manage the now sprawling enterprise. By August of 2004, Hewlett-Packard’s stock had dropped below seventeen dollars, from a high of more than sixty dollars, in 2000. The price was so low that some directors felt that Hewlett-Packard itself had become vulnerable to a takeover, and blamed Fiorina.

At that time, Tom Perkins was not a board member—he was seventy-two, and company rules had required him to resign at seventy. In late 2004, Keyworth suggested that Perkins be asked to return, arguing that Hewlett-Packard needed his technical expertise. After some initial resistance, Fiorina gave in.

Perkins and Keyworth held extraordinary power within the company. In 2002, they had formed a “technology committee,” which typically met the day before the formal board meeting. It was open to any board member, but it was dominated by the board’s scientists and engineers; when Dunn joined the board, she occasionally attended the meetings, but, like the other non-scientists, she couldn’t always follow the more technical discussions. The committee became a board-within-the-board, tackling issues of new product development, competitive strategy, and priorities. Perkins and Keyworth had become intimately familiar with the inner workings of Hewlett-Packard, and with the strengths and weaknesses of its top managers, and were aware of growing unhappiness with Fiorina.

Keyworth was constantly offering Fiorina suggestions: Hewlett-Packard needed better directors, preferably from Silicon Valley, with entrepreneurial backgrounds; the company needed more experienced managers. Fiorina told me that she considered many of these suggestions management issues, not board decisions. Keyworth felt she was dragging her feet.

Three days before a scheduled board retreat in January, 2005, Keyworth and Dunn called on Fiorina to express concerns about Hewlett-Packard’s performance, stock price, unfavorable press, and need to reorganize. Fiorina changed the retreat agenda to accommodate their concerns, but resisted any immediate reorganization.

A few days after the retreat, as Fiorina was about to leave for Davos, a reporter from the Wall Street Journal, Pui-Wing Tam, called to confirm details that Tam had learned about the retreat, including assertions that Fiorina had lost the confidence of the board and that operating responsibilities would soon be shifted away from her. Tam also knew that Perkins was returning to the board and had participated in the retreat.

“It is hard to convey how violated I felt,” Fiorina wrote in “Tough Choices,” her autobiography. “Until a board makes a decision, its deliberations are confidential. Whoever had done this had broken a bond of trust with me and every other board member. . . . Trust is a business imperative. No board or management team can operate effectively without it.”

The next day, Fiorina convened a conference call with all the board members except Dunn, who was on vacation in Indonesia, and demanded a confession from any director who had spoken to Tam or any other reporter.

Perkins subsequently acknowledged that he had spoken to Tam, saying that Tam already had many details of the board deliberations, and that he felt he must try to deflect some of the more damaging disclosures. Perkins says that at one point Fiorina warned him that “even returning a call is confirmation,” and Perkins apologized.

One board member, Lawrence T. Babbio, Jr., a vice-chairman of Verizon, was so distressed by the leak that he urged Fiorina to ask for the resignation of every director, renominating only those she felt could be trusted. Instead, she asked the board’s nominating and governance committee to order an investigation by the company’s outside counsel, Lawrence Sonsini, to identify the leaker.

Other board members were less concerned. As Perkins put it, “Leaks don’t happen in stable, happy companies. They’re a steam valve. People talk. They’re a symptom of something else.” In this case, they indicated dissatisfaction with Fiorina’s leadership. In what Fiorina should have recognized as an alarming turn, the nominating and governance committee also asked Sonsini to poll directors about the effectiveness of the board and Hewlett-Packard’s leadership.

Sonsini, who has been Hewlett-Packard’s outside counsel for many years, is highly respected in Silicon Valley. He and the Palo Alto company he helped build up, Wilson Sonsini Goodrich & Rosati, have represented more venture capitalists, handled more initial public offerings, and represented more technology companies than any other firm. Tom Perkins was an early client. Sonsini’s vast knowledge, his contacts, and his discretion made him the most sought-after lawyer in the high-tech industry. (Sonsini declined to be interviewed for this account.)

Sonsini delivered his report to the board by phone. He found no direct evidence that any board member had been the source of the leak. Only Perkins had acknowledged any contact. As for the board itself, Sonsini identified numerous areas that needed improvement.

Fiorina told me she never had any doubt that the leakers were Keyworth and Perkins. “Everyone on that call knew that both Tom and Jay were the sources. They were allies. They were the ones pushing for the reorganization described in the article. I was clear and unequivocal that this was unacceptable behavior. They didn’t like that.” (Both Perkins and Keyworth emphatically denied being the leakers.)

Fiorina professes still to be mystified by her loss of board support. According to Keyworth, the answer is simple: “Fiorina had a vision, and she did a phenomenal job acquiring Compaq and combining the assets. But we had to make the assets deliver. We had an execution problem. The stock took a big hit. She was a better saleswoman than a manager.”

As Fiorina’s troubles increased, Patricia Dunn began to play a more active role, despite extraordinary personal problems. In 2001, Dunn was diagnosed with breast cancer and then, the following year, with melanoma. She resigned as global C.E.O. of Barclays Global Investors, but kept her seat on the Hewlett-Packard board, where she became chairman of the audit committee. The audit committee was responsible for complying with parts of the Sarbanes-Oxley Act of 2002, which, in response to the Enron, Tyco International, and WorldCom financial scandals, sought to establish new standards for corporate boards, management, and auditors. Perkins and Keyworth, who saw Sarbanes-Oxley as adding an unnecessary layer of bureaucracy, were dismissive of the requirements, and Keyworth had often expressed to Fiorina his disdain for Dunn and her audit-committee work. Others, too, including outside auditors, complained to Fiorina that Dunn was too detail-oriented. Dunn was replaced by another board member, Robert L. Ryan, as chairman of the audit committee in March of 2004.

While Perkins and Keyworth pressed their campaign to oust Fiorina, Dunn, who had been allied with neither the Fiorina supporters nor the technology-committee entrepreneurs, began tilting toward the latter. In 2004, she learned that she had advanced ovarian cancer, which required extensive surgery and eighteen months of chemotherapy. Both Perkins and Keyworth had lost wives to cancer, and they sympathized with Dunn’s ordeal and admired the way she dealt with it. Fiorina, accustomed to hearing Keyworth mock Dunn, sensed the new alignment. “I saw Jay whispering in Pattie’s ear and laughing with her at some private joke,” she recalled in her autobiography. “Pattie seemed extraordinarily pleased to be playing a more leading role.”

Perkins and Keyworth now argued that Dunn, because she was acceptable to both factions on the board, was the best person to tell Fiorina that she was being fired. “I agreed that we needed a change at the top,” Dunn told me. The board also asked her to immediately assume the position of chairman. She consented, after some hesitation; to her surprise, other board members already knew about her selection. Perkins also proposed that she be paid a hundred thousand dollars on top of the hundred-thousand-dollar fee she received as a board member. Perkins would become chairman of the nominating and governance committee.

When the board convened on February 7, 2005, Fiorina delivered a half-hour presentation reiterating her strategic plans and reviewing her record. There were no questions. She was then asked to leave the room; three hours later, she was summoned back. All the directors had left except Dunn and one other board member. Dunn offered Fiorina the option of saying that she had decided to “move on,” but Fiorina said she preferred the truth, which was that she had been fired.

Robert P. Wayman, who has been Hewlett-Packard’s chief financial officer for more than twenty years, was named interim C.E.O. Dunn became “non-executive” chairman, which meant that she would preside over board meetings, recommend board committees and committee chairmen, and be available for consultation with the C.E.O., but would have no active management role. Shareholder-rights advocates have long argued that combining the roles of C.E.O. and chairman concentrates too much power in one person and has contributed to the exorbitant rise in C.E.O. pay. Exactly how power should be shared, however, remains unclear, and varies considerably among companies that have embraced the reform. At Hewlett-Packard, there was talk of Dunn’s having an office at headquarters in Palo Alto, but nothing came of it. No one at Hewlett-Packard reported to Dunn; she couldn’t hire or fire anyone, incur expenses beyond personal incidentals, or give orders to executives and employees.

Dunn told me that other directors—especially Wayman and Babbio—stressed that her most important duties as chairman would be to preside over the choice of a new C.E.O. and to stop the board leaks. She later told a congressional subcommittee:

The most fundamental duties of a director—the duties of deliberation and candor—rely entirely upon the absolute trust that each director must have in one another’s confidentiality. This is true for trivial as well as important matters, because even trivial information that finds its way from the boardroom to the press corrodes trust among directors. It is even more critical when discussions can affect stock prices. . . . Leaking “good” information is as unacceptable as leaking “bad” information—no one can foretell how such information may advantage or disadvantage one investor relative to another.

Dunn asked Wayman how she should proceed with the investigation into the source of the Wall Street Journal leak, which Sonsini’s report had left unresolved. He told her that Hewlett-Packard security had reported to him in his capacity as chief financial officer, and he referred her to Kevin Huska, a security manager. In her testimony, Dunn recalled Huska telling her that the company dealt with leaks at lower levels virtually on a “day in and day out basis.”

In this instance, Huska referred Dunn to an outside investigator named Ronald R. DeLia, whose firm, Security Outsourcing Solutions, based in Boston, had been under contract to Hewlett-Packard for some ten years. Security Outsourcing Solutions, in turn, often hired subcontractors to carry out specific investigative missions, such as obtaining private phone records.

Although Dunn knew nothing about DeLia, she had a high regard for the ethical standards of Wayman and his subordinates, which she had observed as chairman of the audit committee. Dunn called the new investigation Project Kona, for her vacation retreat in Hawaii. In March, she informed the board that a new investigation into the leaks to Tam at the Wall Street Journal had been initiated, but she cautioned that details were confidential, since the board members themselves—including her—were being scrutinized. A majority of the directors supported the initiative.

Meanwhile, Dunn, Perkins, and Keyworth began searching for a new C.E.O.; the board eventually settled on Mark Hurd, who had helped rejuvenate NCR, another old-line technology firm, during a twenty-five-year career there. Hurd’s keen mind for numbers, his strategic instincts, and his managerial skills, along with a reserved, self-effacing demeanor—in contrast to Fiorina’s flamboyance—impressed all three. But before the planned announcement a Business Week reporter called to confirm Hurd’s appointment. The source may well have been outside the company, since by then a wide circle of people knew of Hurd’s selection. Even so, Hurd hadn’t yet informed the NCR board, which could have tried to block his departure. In the end, NCR made no such move, and Hewlett-Packard’s stock rose, confirming the board’s view that Wall Street wanted new leadership. Dunn, Perkins, and Keyworth were pleased that they had worked together so effectively. But any expectations that the Hewlett-Packard board had started on a new era of good will were premature.

During the first months of Dunn’s tenure as chairman, she had met with Perkins in his capacity as chairman of the nominating and governance committee. This can be the most powerful post after the chairmanship, since the committee determines who will be nominated to the board and has responsibility for most internal board matters. Perkins took an even more expansive view of the position, and arrived at the meeting armed with an agenda of broad strategic initiatives that he thought the board should review. He evidently believed that Dunn would defer to him, but, before he could get started, he later recalled, Dunn said that she had uncovered seven disturbing inconsistencies between the company by laws and the director’s handbook. Perkins recalls replying, “I’ve never read either one, nor do I intend to. So can we get something done?” Dunn persisted, saying that she was retaining a consultant on corporate governance to review the documents and propose ways to harmonize them. “Don’t you understand?” Perkins responded. “We’ve got to focus on Dell, I.B.M., market share, technology, and marketing. We have to do this month in and month out.”

Dunn told me that she has no memory of any mention of Dell or I.B.M. She said that she resents the inference that Perkins was a “big picture” strategist while she fussed about governance details. “This was about the governance committee,” she told me. “This wasn’t the place for strategy. All you need to do is say the words ‘corporate governance’ and Tom sees red.” She went on, “The board asked me to be chairman. I didn’t ask for the job, but I took it seriously. I asked myself, ‘How can I contribute? What’s missing?’ The answer is, the board was weak on process. Tom’s view of corporate governance is that a few people—he and Jay—should make the decisions and everyone else is a spear-carrier. That’s the Silicon Valley cowboy way. In the venture-capital world, if Tom says, ‘Do this,’ you do it, or you lose your funding. When I agreed with him that we needed a change at the top, he mistook this for my being in his pocket. I was supposed to be his puppet.”

“What can I say?” Perkins told me. “I was stupid. As a director, she was peripheral, noncontroversial. The other directors would accept her as chairman. I assumed that she was like me. She’d be active. She’d deal with strategy, structure. Above all else, she’d keep the board focussed on what is important, not on dotting the ‘i’s and crossing the ‘t’s.”

Dunn resisted Perkins’s nominees to the board, nearly all of them people he knew in Silicon Valley. “Hewlett-Packard is the foundation of Silicon Valley and all it represents,” Perkins said. “We needed people who know the culture of the Valley, know how to encourage innovation, know our roots. Who did Pattie want? The president of PepsiCo? I called him Sugar Daddy. Or an executive vice-president of Nokia? She was from Finland! Or a vice-president of ExxonMobil? So I said, ‘How long is their product life cycle? A million years?’ ”

Dunn was concerned that everyone Perkins proposed had ties to Kleiner Perkins or to Perkins himself. “It was a perception problem, at the very least,” she told me. “He even proposed a Kleiner Perkins partner. Mark Hurd wanted people experienced with tough problems, like laying off fifteen thousand people. Or creating synergies in mature businesses. Tom wanted people from Silicon Valley. Nominating and governance rejected nearly every one of his candidates, and Mark was the most firmly opposed.”

In the summer of 2005, the board talked about dropping its mandatory-retirement provision, which had to be waived every year to permit Perkins to remain on the board. “It was embarrassing,” Perkins said of the annual discussions of his advancing age. Dunn hesitated to drop the provision, asking rhetorically, “Will this be seen as a step forward in corporate governance? Will we be criticized?” Perkins was furious at the objection; the board voted to abolish the mandatory retirement age.

Meanwhile, Perkins had finished his novel, “Sex and the Single Zillionaire”—the first draft had taken him ten days—and it was about to be published, by ReganBooks. Perkins told Dunn that it should be required reading for Hewlett-Packard employees. He says that he meant this as a joke, but that she took him seriously. Dunn told me, “I thought we shouldn’t be flogging a director’s book.”

Heather was nude upon the bed and Kim, above her, was also nude, but wearing some sort of complicated black leather harness. Through numerous buckles and D-rings, the straps crossed her shoulders, spanned her full breasts, encircled her waist, and passed between her legs to rise again over her firm buttocks to rejoin the other straps at the waist. She held a long, black whip in her right hand. It had a leather handle and numerous strands whirling in the air as she manipulated it over the prone girl on the bed. Heather’s body was glistening in perspiration as she moaned in anticipation of the whiplash, which seemed always to be withheld.

The book caused further rancor between Perkins and Dunn at the January, 2006, retreat. By then, he had given an advance galley to Dunn, and, during cocktails with Hewlett-Packard managers and their spouses, Dunn recalled, Perkins asked her, “Pattie, what do you think of my book?”

Twenty minutes later, Perkins pulled her aside. According to Dunn, he said, “Don’t ever humiliate me in front of managers and board members. You should have just said you liked it.”

Disagreements between Dunn and Perkins became so frequent and so heated that Dunn coined a phrase for them: “chairman abuse.”

When Hurd arrived, on April 1, 2005, to take up his duties as C.E.O., Dunn informed him that an investigation was under way, and she says that he, as the recent subject of a leak, was even more adamant that the leaks be stopped. Later that spring, Hurd convened the company’s top managers and warned that any of them discovered to be leaking would be fired.

As the investigation proceeded, Perkins volunteered to take a lie-detector test to demonstrate that he hadn’t leaked anything. “I have been thinking about the Lie Detector Test (LDT) topic and want to let you know that I was serious about it,” he wrote in an e-mail to Dunn, adding, “The test should be strictly confidential, because of the explosive story that the media might make of it.” (He also noted that he might be able to use the experience as “background for my next novel.”) In a second e-mail, he wrote, “I think our primary purpose should be to stop the leaks. Period. I personally put a secondary value on knowing the source(s)—I actually fear knowing, in case it is one or more people whom I respect.” Dunn took up the possibility of polygraph exams with Hewlett-Packard security officials, who dismissed them as unreliable.

According to Ron DeLia, the private investigator, on June 15th, in a conference call with Dunn and Ann Baskins, Hewlett-Packard’s general counsel, he revealed that his investigators had obtained private phone records of reporters. They were later identified as Pui-Wing Tam; Peter Burrows and Ben Elgin, of Business Week; and John Markoff, of the Times. DeLia described a ruse known as “pretexting,” although he isn’t certain that he used the term. He later told lawyers retained by Hewlett-Packard that, in their words, “it involved investigators requesting information from operators orally, over the phone, pretending to be someone else if necessary.” He added that Baskins was “concerned” about whether this was legal. He told her that he “was aware of no laws that made pretexting illegal and no criminal prosecutions for such activities.”

Dunn’s notes indicate that a few days later, on June 20th, she discussed progress with Hurd, and noted “a week to ten days away/some gaps remain.” E-mails indicate that Hurd was also working independently with security personnel to crack down on leaks. A July 6th e-mail from Anthony R. Gentilucci, a senior member of the Project Kona team, refers to a “request from CEO” to “put a short term and long term plan together to address information security gaps that the CEO perceived at the senior executive level/Headquarters.”

On July 22nd, Dunn, Hurd, and Baskins met with DeLia and other investigators to review the results of the investigation in an elaborate PowerPoint presentation with cryptic references to “BoD Member 1” and “BoD Member 2.” The presentation spoke of “intelligence” that had been gathered regarding contact between board members and reporters. Hurd, who arrived late, subsequently said he thought that the investigators had theories with “nothing behind them,” and left the meeting fifteen minutes early to catch a flight. At the September board meeting, Dunn told directors that the investigation was “slowing down.” It was hoped that the leaks had ended.

At 5:25 P.M. on January 18, 2006, Dawn Kawamoto, the CNET reporter, used her cell phone to call Jay Keyworth’s home number. She said that she had rescheduled a lunch meeting fifteen minutes later than they had planned, and hoped that he didn’t mind. The call lasted a minute.

In the years since their first conversation, during the Compaq acquisition, Keyworth and Kawamoto had spoken often by telephone, and he had found her to be a sympathetic listener, especially while his wife was ill with terminal cancer. After his wife’s death, Keyworth remarried, and in August of 2005 he informed Kawamoto that he was leaving Santa Fe and moving to the Bay Area. She remarked that they would now be neighbors, and suggested that they finally meet.

At the Café at Chez Panisse, upstairs from the fashionable Berkeley restaurant co-owned by the chef Alice Waters, Keyworth thanked Kawamoto for recommending a hiking trail near Indian Wells, the site of the Hewlett-Packard board retreat the previous weekend. He told her he had barely found time for a hike; the retreat kept the directors so busy that by 10 P.M. each night they were tired and went to bed. He also praised Mark Hurd. After all the years of turmoil, he felt that the company had finally found a leader worthy of the founders’ legacy. What was frustrating was the fact that the media and Wall Street seemed to regard Hurd as merely an efficient manager rather than as a visionary; those who had watched Hurd’s performance at the retreat knew how forward-thinking he was. The conversation drifted to other topics, and when the meal ended the two promised to stay in touch.

When Kawamoto’s story appeared, several days later, Keyworth recognized himself as the source who said that he had been “pooped” each evening. Even so, he says, he was surprised, since he had thought of his lunch with Kawamoto as a social occasion. (Kawamoto has refused, on the ground of confidentiality, to discuss the meal or her sources for the story, except to say that she has multiple sources at Hewlett-Packard.) In any case, on balance Keyworth was pleased. The story didn’t include his praise for Hurd, but it did focus on the company’s long-term goals rather than on its desperate cost-cutting measures, and Keyworth felt it would help rebut Wall Street’s perceptions of Hurd as a mere bureaucrat. He considered it good press. (Tom Perkins later referred to the story as a “wet kiss.”)

At Hewlett-Packard, though, the story was met with alarm. A new investigation was immediately launched, which Dunn called Kona II. Concerned by the failure of Kona I to identify the Wall Street Journal leaker, Dunn asked Ann Baskins if the company could hire Kroll, a leading corporate intelligence agency, but Baskins preferred that the investigation remain “in house.” (Dunn has stressed that she had no authority to hire or compensate anyone, and that Hewlett-Packard security reported to Wayman, not to her.) Baskins asked an employment lawyer at the company, Kevin Hunsaker, to head the renewed investigation. In contrast to the almost casual way that Kona I had been pursued, this time Hunsaker reported progress to Dunn and Baskins on Friday afternoons.

With Hunsaker in day-to-day charge, the investigators undertook their mission with extraordinary zeal. In an eighteen-page report summarizing their efforts, Hunsaker wrote that the team reviewed “more than ten (10) thousand electronic and hard-copy articles pertaining to HP published by CNET” and other publications during the past six years and reviewed “all articles (on any topic) written or contributed to by Dawn Kawamoto.” The document makes clear that the team obtained phone records not just from Hewlett-Packard directors and employees but also from reporters. And, in what sounds like a parody of a le Carré novel, the team “engineered and executed a covert intelligence-gathering operation” and “conducted surveillance activity and reviewed existing video surveillance footage.”

The “covert intelligence-gathering operation” was especially elaborate. Hunsaker and his team of investigators created a fictitious disgruntled employee named Jacob to make e-mail contact with Kawamoto. Dunn, asked to approve the operation, referred the investigators to Hurd, who authorized it.

A file with tracking capabilities was attached to the e-mail. (Hurd, who declined to be interviewed for this account, has said that he didn’t know about this aspect of the operation.) The investigators hoped that Kawamoto would seek confirmation of Jacob’s revelations with her board source by forwarding the e-mail. The e-mail went through several drafts, as the team tried to settle on the right “persona” for Jacob. “I think we have to figure out who Jacob is, weak, strong, vindictive, a Bill and Dave fan,” one of the drafters noted. The final result went to Kawamoto:

Hello, I am a senior level executive with a high tech firm in the valley and an avid reader of your columns.

My real name is not used, you might understand why. Not quite sure how to approach you on this, but I’ll attempt anyway.

The descriptions you gave below can apply to a number of high tech firms in the valley. So, yes, please give me a call. I would suggest calling is the best way to handle this.

I can be reached at the office from 5 am to 2 pm (PST), Mon.-Fri. My number is below. Just identify yourself as Jacob from the e-mail when you call.

Thanks, Dawn

The team sent more e-mails, but Kawamoto forwarded none of them. As the investigators pored over her phone records, they discovered calls to “a hotel in Disneyland,” and they developed a plan to trail Kawamoto and her daughter to the theme park; the scheme was aborted when they discovered she had already checked out. They staked out both her home and Keyworth’s, and a lecture that Keyworth gave at a conference at the University of Colorado at Boulder on January 31st. They hoped that Kawamoto might attend the conference.

None of these efforts yielded anything of value. Then, on February 6th, while examining Kawamoto’s records, they came across the one-minute call from Kawamoto to Keyworth’s home phone number on January 18th, about the restaurant reservation. They also found a second, ten-minute call between the two. Their mounting excitement is evident in the e-mail exchange that accompanied the discovery:

HUNSAKER: Is Keyworth’s Piedmont # in the phone book? If not, how the hell did Kawamoto know the number? Keyworth’s only lived there a couple of months, right? Which means he must have given it to her recently. . . .

DELIA: Checking on that now. . . .

HUNSAKER: Do we have the outbound calls from Keyworth’s home from that date, so we can confirm that he and/or his wife made calls from the house that day? . . . Do you know what time of day the call went from Kawamoto to the Keyworth residence? I’m starting to get excited. . . .

DELIA: This is definitely great news. . . . May be the direct connection we’ve been looking for!

The investigators had indeed stumbled on direct evidence of contact between Kawamoto and a Hewlett-Packard director. But they had no way of knowing the substance of those calls.

Hunsaker’s report methodically recounts the tactics used in the investigation, but relegates legal and ethical issues about activities like pretexting to a footnote. Even so, the tactics raised significant concerns inside Hewlett-Packard. Two former police officers who worked for Hewlett-Packard security, Fred Adler and Vince Nye, questioned the legality of the method, according to notes of a later interview with Hunsaker. Nye, after learning that investigators had discovered Kawamoto’s call to Keyworth, e-mailed Hunsaker, “I have serious reservations about what we are doing. . . . It is very unethical at the least and probably illegal. . . . I am requesting that we cease this phone number gathering method immediately.” Nye’s boss, Timothy O’Neill, said in a memo that he had mentioned Nye’s reservations in a meeting with Hunsaker, Gentilucci, and “the private investigator,” presumably DeLia.

“Each one of them assured me that what was being done was legal,” O’Neill reported in the memo. “Kevin and Tony further assured me that the tactic was knowingly approved by the executive sponsors of the investigation.” According to O’Neill, Hunsaker agreed to seek an opinion from outside counsel on the legality of pretexting and other tactics that were being used.

When Hunsaker was later questioned on this point by lawyers retained by Hewlett-Packard, he said that he did “about an hour’s worth of online research.” He also conferred with Anthony Gentilucci, of the Project Kona team, in this e-mail exchange:

HUNSAKER: Hi, Tony, How does Ron [DeLia] get cell and home phone records? Is it all above board?

GENTILUCCI: The methodology used is social engineering, he has investigators call operators under some ruse, to obtain the call record over the phone, it’s verbally communicated to the investigator, who has to write it down. In essence the operator shouldn’t give it out, and that person is liable in some sense. . . . I think it’s on the edge, but above board. We use pretext interviews on a number of investigations to extract information and/or make covert purchases of stolen property, in a sense, all undercover operations.

HUNSAKER: I shouldn’t have asked.

Hunsaker did ask Gentilucci to get in touch with outside counsel. John Kiernan, a Boston-based lawyer known to both DeLia and Gentilucci, professed to know of no cases or laws in which pretexting had been declared illegal. Hunsaker relayed this to Baskins, the general counsel, assuring her that the practice was “not unlawful.” Hunsaker later told Baskins that Kiernan was well qualified to make this assessment; he had offered the same judgment the previous year, during Kona I. But Kiernan wasn’t exactly an independent source—DeLia, who was also based in Boston, had his business phone calls routed through Kiernan’s office. In any case, obtaining confidential information under false pretenses—pretending to be someone else—obviously raises questions of possible fraud. It could violate any number of common-law and statutory anti-fraud provisions, including criminal mail and wire-fraud provisions.

In April, 2006, Hurd met Fiorina, whom he didn’t know, for breakfast. He was exasperated by tensions within the board, and Fiorina was surprised at how vehement he was. Hurd said that on some occasions board members had almost come to blows. He told Fiorina that Dunn had a plan for dealing with the problem, and said he supported the plan. Fiorina wondered what the plan might be, but otherwise wasn’t surprised. Knowing the personalities, she felt that a big blowup was coming.

Dunn had grown increasingly con-fident that Kona II was going to produce results. On March 11th, Hunsaker had completed a first draft of the investigative report, and sent it to Dunn, Hurd, and Baskins. A few days later, he briefed them on his conclusions. Keyworth was named as the likely source of the leak to Dawn Kawamoto. The evidence was strikingly circumstantial and conjectural. Early on, the team had narrowed the suspects to the directors at the retreat who had attended the technology-committee meeting, chaired by Keyworth, at which the topics mentioned in Kawamoto’s CNET article were discussed. Even this assumed that those directors hadn’t described the meeting to anyone else, who might, in turn, have spoken to the CNET reporters. The “smoking gun”—the two calls between Kawamoto and Keyworth—suggested only that they spoke, not that Keyworth had imparted con-fidential information.

It is obvious from Hunsaker’s final report that Keyworth and Perkins were suspects from the start; the pretexting of other directors’ records seems almost an afterthought. Both Perkins and Carly Fiorina are convinced that the entire investigation was a thinly disguised effort by Dunn to get Perkins and Keyworth off the board. “It was known around the Valley that Tom and Jay wanted to get rid of Dunn,” Fiorina told me.

Keyworth emerged as the primary suspect. According to Perkins, Dunn told him, “I’m still working on the leaks. This time, I’m going to find out who did it.” And, later, “We’re getting close.” Now Perkins became alarmed that exposing a director as a leaker could further damage relations among board members, and he took Dunn aside. As chairman of the nominating and governance committee, he stressed that the matter should be handled privately and quietly. He recalls telling her, “I don’t want to know who leaked. We have good directors. They’re doing important work. Let’s don’t embarrass anyone. Sit down with whoever it is. Get an admission, an apology, and a promise never to do it again. That will be it. We’ll go on.” Perkins was convinced that Dunn agreed and would proceed accordingly.

Dunn, however, insisted to me that she never made such a commitment. “I said, ‘We’ll see’; ‘I’ll make a note of it.’ I never promised anything. But Tom, being Tom, couldn’t tell the difference.”

Perkins was prepared by now to propose that Dunn be removed as chairman, but Keyworth and another director, Lucille S. Salhany, persuaded him to hold off.

At the end of the March board meeting, in Los Angeles, Dunn asked Perkins and two other directors to stay. What happened next is disputed. According to Perkins, Dunn said, “I need intervention here—Tom is out to get me,” and burst into tears. (Dunn denies that.)

Dunn went on to tell Perkins, “I didn’t ask for this. I’m doing the best I can. If you don’t agree, if the board doesn’t agree, I’ll step down. But we don’t need these disruptive outbursts.”

That evening, Dunn, Baskins, and Hurd were having a drink in the lounge of the Park Hyatt. They had received a preliminary report from Hunsaker identifying Keyworth as the leaker. Dunn later told me, “We were reeling. What do we do now?” When they noticed Keyworth having a drink at the bar, Hurd said, “I’ll take care of this.”

Hurd led Keyworth to another table and, according to Hurd, gave him an opportunity to confess, but Keyworth didn’t avail himself of it.

Keyworth has an entirely different memory of the conversation: after a few references to strategy and potential acquisitions, and praise for what both considered an excellent board meeting, the conversation turned to the death of Keyworth’s first wife. Keyworth says that he can’t remember Hurd referring to a leak investigation and that if Hurd had mentioned it he would have had no response, since he thought the only matter under investigation was the 2005 Wall Street Journal article about Fiorina. He’d never been asked about the CNET piece and had no idea that its origin was now the subject of a full-blown inquiry.

After this conversation, Hurd rejoined Dunn and Baskins and summarized his encounter with Keyworth. He said he had told Keyworth that the leaker had been identified and then waited for him to confess. “He looked me straight in the eye and didn’t say a word,” Hurd said.

Dunn told me, “Mark would have been so ready to support Jay if he had confessed and said he made a mistake. Mark would have been his champion. He would have fixed it. That would have been it.”

Over the next month, Dunn, Hurd, and Baskins debated how to proceed. Dunn reported that Perkins had been “pressuring” her not to reveal the identity of the leaker and to keep the information from the full board. She said that she was uncomfortable with this arrangement, a Silicon Valley “cowboy” approach, especially since Perkins and Keyworth were close friends. According to Dunn, in a meeting she had with Hurd, Baskins, and Sonsini, the outside counsel, it was decided to refer Hunsaker’s report of the investigation results not to Perkins’s governance committee but to the audit committee. This approach conveniently excluded Perkins, and Dunn pointed out that he was likely to be furious. At this meeting, both Baskins and Sonsini said that it would be improper to keep the information from the full board. Dunn agreed to break the news to Perkins just before the board meeting.

On May 17, 2006, Robert Ryan, the chairman of the audit committee, asked Keyworth if they could meet privately at seven the next morning, before the board meeting. When the two men sat down, Ryan produced a summary of Hunsaker’s report. Even then, Keyworth was bewildered, as he put it, that the focus was on the CNET article. Keyworth readily acknowledged that he had spoken to Kawamoto over lunch and had mentioned the retreat, saying, “Why didn’t you just ask me?”

When Perkins arrived for the board meeting, Dunn asked him to step into a private room adjoining the boardroom. “I found the leaker,” Dunn said, according to Perkins.

Oh, shit, Perkins thought.

When they entered the room, he was startled to find men hunched over a table loaded with electronic equipment. “What’s this?” he demanded. They turned out to be company security personnel, monitoring the board meeting to prevent eavesdropping. Dunn asked them to step outside. (She said that she was as surprised as Perkins to find them there: “It was like out of a James Bond movie.”)

Dunn said, “Tom, the leak investigation has concluded. It looks like Jay is the one who has been talking to the press.”

“I’m sorry that it’s come to this,” Perkins said, according to Dunn. “It’s very unfortunate.” He seemed saddened but not angry. “Pattie, you had no choice but to do this investigation.”

Dunn was surprised at his equanimity. “Tom, this has to go before the whole board.”

“I understand,” he replied.

Perkins, however, says that he was flabbergasted. He was also upset that Dunn had bypassed the governance committee and was bringing the matter to the full board, despite what he considered an explicit promise to the contrary.

The leak investigation was the first matter on the board’s agenda. Ryan summarized the investigation, mentioning that the results were conclusive. He said that before the meeting he had spoken to the director who had been identified as the leaker, and the director had admitted speaking to Kawamoto.

Finally, Ryan revealed that the leak had come from Keyworth, and asked Keyworth to address the board.

Keyworth explained that he had first spoken to Kawamoto years earlier, at the behest of the company, and said that she was an influential reporter who often wrote fairly and responsibly about the company. “I apologize for any discussion I had with the reporter in question that may have resulted in any of my colleagues on this board losing trust with me,” he said. He also stressed that he wasn’t the source for the earlier Wall Street Journal article or for any others. Still, he promised to exercise caution in future dealings with the press. Keyworth told me, “All I did was take advantage of a lunch with a reporter to say some nice things about Mark Hurd. I thought the worst that might happen would be that they’d slap my wrist.”

Perkins says that he agreed, and was eager to leave the issue behind. “Let’s accept his apology and his promise not to do it again,” he told the board. “Let’s move on.”

Lawrence Babbio, the Verizon vice-chairman, broke in. “I think this is pretty serious. I think Jay should leave the room.”

Perkins says that he said, “No!” and expressed his objections to the investigative tactics. “Let’s stop this. How can this be legal?” He says that both Dunn and Baskins said that they had reviewed the issue and that procuring the phone records was legal.

“Even if it’s legal, it’s wrong!” Perkins says he exclaimed. “Jay is the longest-serving director on this board!”

At some point during the meeting, Keyworth was asked to leave the room. In the ensuing discussion, as Perkins recalls it, he eventually burst out, saying he felt that he had been “betrayed” by Dunn. He said, “Pattie and I had an agreement to handle this quietly and privately. We should not be discussing this.”

Dunn has disputed Perkins’s account of the meeting. Testifying before a House subcommittee, she said:

Mr. Perkins’ anger was directed entirely at me, and centered on the “betrayal” he alleged at my not having abided by an agreement that he said we had to cover up the name of the leaker. I had little opportunity to respond to his outburst except to say, “Tom, we had no such agreement.” . . . At no time during Mr. Perkins’ outburst did he make any statements whatsoever about the leak investigation—including its justification or its methods.

A Hewlett-Packard spokesman noted recently that none of the other directors who were present recall Perkins’s raising any legal concerns.

A board member named John Hammergren asked Hurd what would happen to an employee who had leaked this information. “He’d be fired,” Hurd replied.

As each director expressed his or her opinion, it became clear that sentiment was turning against Keyworth. Finally, Babbio moved to ask for Keyworth’s resignation.

“This is wrong,” Perkins says he argued in a final effort to derail the vote. “Let’s don’t do this today. Let’s sleep on this. Doing this in the heat of the moment, you always get a bad result.”

Babbio insisted that there was a motion on the table.

A secret ballot was conducted—something nearly unprecedented on the board—and Baskins announced that the motion to ask Keyworth to resign had passed.

Perkins stood up and snapped his briefcase shut. “I resign,” he said, and left the room.

As he walked briskly down the hall, he passed Keyworth, waiting anxiously for news of his fate.

“Tom?” Keyworth asked.

“I’m out of here!” Perkins replied.

The board voted to accept Perkins’s resignation, and Dunn went out to ask Keyworth to step down. He refused, saying the shareholders had elected him, and he felt the punishment was out of proportion to the offense.

Later that evening, Dunn received an e-mail from Perkins, who was planning to début his new yacht, the Maltese Falcon, at a gathering at La Spezia, on the Italian coast:

Tom, understood. This falls on my 25th wedding anniversary so guess I no longer have a conflict.

Regards,

Pattie

Shortly after Perkins returned to his office in San Francisco, Larry Sonsini, the outside counsel, called to discuss the resignation. Perkins had worked with Sonsini on various matters for forty years, and liked and trusted him.

“I hear you and Pattie had a real set-to,” Sonsini began. “Have you really resigned?”

“Yes, and I’m not going back,” Perkins answered.

A post-Enron reform requires that resignations by directors be reported to the S.E.C., and if the resignation stems from any disagreement with the company or the board the reasons must also be disclosed. Sonsini mentioned this, and added, “If it’s a personal matter, it doesn’t need to be disclosed. How would you characterize this? Is the dispute between you and the company?”

“No. It’s between me and Pattie. I can’t breathe the same air with that woman.”

“What should we say in the press release?”

“Just say I resigned. But please—don’t say I resigned to spend more time with my children.”

Hewlett-Packard subsequently filed a report with the S.E.C. saying only that Perkins had resigned.

That weekend, Perkins flew to Daytona Beach, Florida, for the Romantic Times Booklovers annual convention, where “Sex and the Single Zillionaire” was being launched. After a “pick the next Mr. Romance” contest, women vied to win “a date with a zillionaire”—Perkins—by submitting personal essays. Perkins had dinner with the three finalists, one of them a grandmother. “I was dreading it, but it was really very pleasant,” Perkins recalled. Then he flew to Istanbul, where the Maltese Falcon, after five years of construction, by more than three hundred laborers and craftsmen, was to be launched.

Despite his holiday, Perkins found himself increasingly preoccupied by the previous week’s events, and he was unable to resist continuing to try to orchestrate events at Hewlett-Packard. Finally, he sat down and wrote a long e-mail to Dunn:

For you to have, for months, used the most sophisticated electronics and the best possible technicians (at doubtless huge cost) to SECRETLY monitor all the telephone and email contacts of all the directors, to discover the source of a relatively benign leak many months old, is itself appalling! (You had best hope that these actions do not, themselves, become public. At this moment, with the President, the CIA and the NSA up to their necks in a monitoring scandal, this news would be devastating to you personally . . . You should prepare for a firestorm.)
After rereading the note, however, Perkins decided that it was unduly harsh, and sent a different version:

Pattie:

As the, now defunct, chairman of the Hewlett-Packard N&G committee, I offer you one last bit of advice. Given last Thursday’s debacle, you should resign as chairman of the board. The board may choose to re-elect you immediately, but you should give the directors that choice.

Now that the dust has settled, I can only paraphrase Nathan Hale: I regret that I have but one HP board seat from which to resign.

Tom

A few weeks later, Perkins attended a meeting, in London, of another board he sat on—that of News Corporation, Rupert Murdoch’s media conglomerate. Before dinner, Perkins pulled aside Viet Dinh, a fellow-director who is a professor at Georgetown Law School and specializes in corporate governance, privacy, and national security. A graduate of Harvard Law School, Dinh is a former Supreme Court clerk, and, as Assistant Attorney General under John Ashcroft, he was the principal author of the Patriot Act. Perkins had earlier sent him an e-mail explaining what had happened on the Hewlett-Packard board.

“Did you get my e-mail?” Per-kins asked. “What are your thoughts?” Dinh had been startled by its contents. Though he has been depicted as a less than zealous defender of privacy rights, he had no doubt that the Hewlett-Packard leak investigation was a serious invasion of privacy and quite possibly criminal.

“It’s extraordinary,” he told Perkins. “A chairman spying on her board? It’s unconscionable.” Dinh was also concerned about Perkins’s potential liability as a director. Perkins decided to retain his services.

On June 19th, Perkins e-mailed Sonsini, relating his conversation with Dinh and his questions about the legality of the monitoring. Sonsini dismissed Perkins’s concerns, focussing instead on the fact that Perkins was discussing the case with an outsider, writing:

Tom, be careful about your discussion about the inquiry and the Hewlett-Packard board process and deliberations in that all of that is confidential. . . . You do not want to be in breach of your duties.
Perkins replied:

In view of Viet’s unqualified opinion that it was illegal, I think the board needs to know the potential risks, if any.

Eight days later, Sonsini responded, saying that he had talked to Baskins and Hunsaker, and that “pretext calls” were a “common investigatory method.” He concluded, “It appears, therefore, that the process was well done and within legal limits. The concerns raised in your email did not occur.”

Sonsini was the third lawyer representing Hewlett-Packard who, when asked about the legality of surreptitiously obtaining private phone records, argued that it was legal.

Perkins again consulted Dinh, asking if there was any way that the company could have got the records legally without a subpoena. Dinh said he doubted it. “There’s a rampant problem out there called pretexting,” he said.

“Pretexting!” Perkins exclaimed. “It’s in Sonsini’s memo.” He said that he didn’t know what it meant.

Having made no progress with Sonsini, Perkins wrote to Baskins on July 16th asking for a copy of the draft of the minutes of the contentious board meeting. After reviewing them, he replied, “I cannot accept the minutes as written,” because, he said, they omitted any mention of his objections to the legality of the investigation, his breach with Dunn over the matter, and his request to delay the vote on Keyworth. He asked to see a copy of the final draft, “trusting that these essential elements will be included.”

On July 28th, when Perkins still hadn’t received the amended minutes, despite repeated calls to Baskins, he e-mailed the entire Hewlett-Packard board:

Had I been informed of these illegal activities prior to the May 18th meeting, I would have stopped them, or failing that, brought them to the attention of the full board. Now, I must insist that the Hewlett-Packard board undertake a full investigation of the practices . . . and take whatever disclosure and/or corrective action is required.

This is an extremely serious matter and I have engaged counsel for advice.

That letter, too, went unanswered. At Hewlett-Packard headquarters, there was concern over Perkins’s barrage, but Dunn told me, “No one responded to Tom. They dragged their feet. I told Mark, Larry, Ann, ‘Don’t ignore him. He’s dangerous.’ ” She felt they owed him a response—as well as a firm reminder that he had never expressed any concern about the legality of the investigation. But Sonsini responded, “Pattie, you’re taking this personally. It’s not about you.”

Earlier in July, Perkins had received a letter from A. T. & T. saying that it had taken steps to “lock” his online account as a result of “suspected unauthorized access.” Perkins had never signed up for an online account. The account had been established on January 30th by “mike@yahoo.com,” who had provided Perkins’s phone number and the last four digits of his Social Security number. A. T. & T. said that the breach had been found during a broader A. T. & T. review of “pre-texting practices.”

On August 14th, Perkins wrote another letter to the board, declaring, “I have direct proof of these untoward and illegal practices. My personal phone records were ‘hacked.’ ” The dispute was now more than a personal disagreement with Dunn, so he also demanded that Hewlett-Packard file a copy of his letter with the S.E.C. within two business days, as required by disclosure law, and noted, “I am now legally obliged to disclose publicly the reasons for my resignation. This is a very sad duty.”

On August 16th, Ann Baskins wrote to Perkins to say that the board had rejected his requests; she said that the minutes had already been approved and posted, because they were accurate as drafted, and denied that Perkins had questioned the legality of the surveillance. Nor would Hewlett-Packard amend its S.E.C. filing disclosing Perkins’s resignation. “Mr. Sonsini reported that you confirmed that you had no disagreement at the time of your resignation with either the Company or the Board of Directors.” Like Sonsini, Baskins reminded him that to disclose anything about Hewlett-Packard or the board would “constitute a breach of your fiduciary obligations to the Company.”

Dinh and Perkins thought that, on the contrary, he had a legal obligation to report what he knew to the S.E.C. and other regulators.

Also on August 16th, Dunn, having read Perkins’s latest letter, e-mailed the board:

The question is why has Tom taken such an aggressive, take-no prisoners stance that will, if pursued, redound negatively for everyone, not least himself, and hurting the company about which he professes to care so much?
Her answer:

Tom’s model of governance may be appropriate in the world of venture capital, but it is outmoded and inappropriate in the world of public company governance.

Dinh wrote a letter demanding that the company amend its S.E.C. disclosures and file a copy of Perkins’s letter with the S.E.C. “We will take appropriate action,” he warned, after receiving no reply. The next day, Dinh contacted the S.E.C., the U.S. Attorney’s offices in Manhattan and San Francisco, the California Attorney General, the F.C.C., and the F.T.C., providing them with copies of Perkins’s correspondence.

Only after being notified by the S.E.C. and the California Attorney General that they had launched investigations of Hewlett-Packard’s handling of the matter did the company amend its disclosure form. On September 6, 2006, it acknowledged that investigators it hired had engaged in pretexting and that “counsel could not confirm that the techniques employed by the outside consulting firm and the party retained by that firm complied in all respects with applicable law.”

In the weeks before the company made the disclosures, Hurd and other directors sold their Hewlett-Packard shares for a total of $39 million, according to a shareholder lawsuit filed in Santa Clara Superior Court. Sales by insiders such as these must be disclosed; S.E.C. filings indicate that Hurd received $4.38 million, and Bob Wayman, the interim C.E.O. whom Dunn had consulted before Kona I, realized $29.14 million. According to the complaint, this represents the “busiest period of stock sales by top HP insiders in five years.” The suit charges some of the defendants with insider trading, in that they sold while in possession of “material non-public information” that was likely to depress the shares. Hewlett-Packard has denied the allegations, saying that the sales were approved by the company and complied with all laws and regulations governing insider sales.

The S.E.C. filing inevitably provoked numerous press reports. Fiorina was on tour promoting “Tough Choices” when a reporter showed her a list of people who had been pretexted. Her name was on it, along with her cell-phone and home-phone numbers. “Having fired me,” she said to me, “that they would then pretext me was unbelievable!” The media coverage intensified when Hewlett-Packard admitted that not just directors and Hewlett-Packard personnel but reporters had been pretexted.

When Dunn read the press reports, she saw herself portrayed as a spymaster, a process freak, obsessed with leaks. She had masterminded the whole operation. Newsweek put her on the cover as “The Boss Who Spied On Her Board.” “I was stunned,” Dunn told me.

Initially, Hewlett-Packard strongly backed Dunn. The company had ordered an “independent” investigation by Sonsini’s firm, which criticized her for not bringing in outside counsel for Kona I but otherwise concluded that she had acted properly. Sonsini told her that “not even one out of ten” chairmen would have handled the leaks and the resulting investigation any differently. But then another team of lawyers came in. Dunn began to be excluded from meetings where, she suspected, her own future was being debated, and on Monday, September 11th, a Business Week headline declared, “HP’s Board Split Over Dunn.” The article quoted anonymous Hewlett-Packard directors—leaking to the press.

That weekend, Sonsini and Ryan had called her at home. “The directors have met and discussed this,” Sonsini said, and told her they had concluded that Dunn should remain a director but consider stepping down as chairman. “It’s your decision, but we feel this would take the heat off both you and the company.”

Dunn drove to the company’s headquarters. Hurd, Wayman, and Baskins were there; the other directors participated by telephone. After making a brief statement, Dunn waited in Hurd’s office. An hour later, he returned and told her, “The board wants you to resign as chairman, effective in January.” After some initial reservations, Dunn agreed. Though no longer chairman, she would remain a director.

The board met again the next morning at 5 A.M. To Dunn’s surprise, most of the discussion focussed on press releases announcing settlements with Keyworth, who had by now offered to resign, and Perkins. Keyworth was lavishly praised, and Hewlett-Packard agreed to reimburse Perkins $1.5 million in legal fees, and to pay Keyworth’s legal fees as well. “I was horrified,” Dunn told me. “All the talk was ‘Would this satisfy Jay and Tom?’ ”

As might have been predicted, the plan to have Dunn retire as chairman but remain on the board only fuelled more damaging press reports, especially after the California Attorney General, Bill Lockyer, announced that Hewlett-Packard was being less than coöperative with his investigation. On September 21st, he stated, “We ran into a brick wall. Frankly, I’m pretty angry about it.”

The board met again, and Dunn polled each member individually. “No one supported me,” she told me. “They said, ‘This is horrible,’ they felt terrible, but I should resign. I had become a ‘distraction’ for the company. John Hammergren told me, ‘You need to defend yourself without thinking of Hewlett-Packard.’ I thought that was a kind comment.”

The press conference to announce Dunn’s resignation was scheduled to be held at 1 P.M. on Friday, September 22nd. Dunn’s request to participate in the press conference was rejected, but she felt that she was parting on good terms. Hurd embraced her, and every board member followed suit, hugging her and murmuring, “This is so unfair. We’re sorry. Thank you.”

At the press conference, Hurd acknowledged that the processes “broke down, and no one in the management chain, including me, caught them.” He thanked Dunn for her eight years of service. At the same time, he said he had received information that is “very disturbing to me,” and a Hewlett-Packard lawyer offered a narrative of the events that placed the blame squarely on Dunn. Dunn was especially upset that the lawyer said she contacted private investigators, without mentioning that it was a Hewlett-Packard security manager who had sent her to them.

After the press conference, CNBC turned to a panel of experts, among them Viet Dinh, who praised Dunn for “a courageous and graceful thing” and for “taking responsibility for the investigation that she initiated, conducted, and supervised.”

That same day, Hewlett-Packard announced that Mark Hurd would become chairman as well as C.E.O. Those who supervised the leak investigation—Ann Baskins, Kevin Hunsaker, and Anthony Gentilucci—have resigned from the company. Bob Wayman, the interim C.E.O. when Kona I began, retired.

On Wednesday, October 4th, Dunn was charged by the California Attorney General with four felony counts: fraudulent wire communications, wrongful use of computer data, identity theft, and conspiracy. She pleaded not guilty. Also charged in the criminal case were Hunsaker and DeLia and two private investigators, Matthew DePante and Bryan Wagner (a.k.a. “mike@yahoo.com”). They, too, pleaded not guilty. Baskins’s lawyer said last week, “A general counsel has to be able to rely on her senior counsels’ research and advice, particularly when she has hundreds of lawyers working for her worldwide.” Hunsaker’s lawyer said, “There cannot be a violation of law without an intent to violate the law, and Kevin absolutely believed that the investigation was being done in a legal and proper way.”

The S.E.C. is continuing to investigate Hewlett-Packard’s compliance with disclosure obligations and other issues, as is the F.B.I. and the U.S. Attorney in California’s Northern District. On January 12th, one of the private investigators, Bryan Wagner, pleaded guilty to federal charges of identification theft and conspiracy and has been coöperating with federal investigators, a potentially ominous turn for others under investigation.

I had dinner with Dunn in San Francisco the first week in January. The previous June, she had learned that she had a recurrence of ovarian cancer, and, after surgery, had resumed her chemotherapy treatment. She was eager to recount her story, and to rebut the many myths that she maintains have arisen about her. In the contest between her and Perkins—one representing the post-Sarbanes-Oxley world of accountability and governance, the other the action-oriented culture of Silicon Valley—Dunn believes that she has been thoroughly vanquished. “I bow to Tom,” Dunn told me. “He is a powerful man. He’s far more powerful than I am.”

Still, all but one of the Hewlett-Packard directors with close ties to Bill Hewlett and Dave Packard, including Perkins and Keyworth, are now gone. The directors who have taken their place—the Nokia and ExxonMobil executives, a banker from Wachovia—are not the Silicon Valley heroes Perkins championed but managers from large public companies, exactly the kind of director sought by Dunn. Across the Valley, technology companies have been adding seasoned governance experts to their boards.

Keyworth told me that the allegations that he was a “leaker” have caused him irreversible harm. “I’ve had some tough criticism in my life,” he said, “but I’ve never been dragged in the mud like this before. I kept the nation’s atomic secrets! I’m on the board of General Atomics, which makes the Predator aircraft. I’m close to top people in the U.S. military. Now I’ve been branded a ‘leaker.’ ” Though readily acknowledging that he was a source for Kawamoto’s January 23rd article (a “puff piece,” as he calls it), he resents insinuations that he leaked any confidential Hewlett-Packard information.

Perkins feels vindicated by the outcome, and, from all appearances, remains close to Hurd. In an e-mail to Hurd on September 12th, Perkins wrote, “When I resigned I did it in anger, but I still believe it was the right thing to do. . . . You should know that I always wanted you to be chairman, but this was an awful way to get there.” A week later, in a second e-mail, Perkins informed Hurd that a friend, the Silicon Valley venture capitalist and Kleiner Perkins partner John Doerr, had spoken with Bill Lockyer, the Attorney General:

I am continuing to try to take the steam out of the boiler as it pertains to you. John Doerr had a very good conversation with Bill Lockyer about the situation based upon my assessment (i.e., you are one of the victims). It can’t hurt.

Perkins told me that he never thought the affair would reach this juncture. “In the beginning, all I wanted was to get the facts and get the minutes right. I never wanted a scorched-earth campaign. I didn’t expect them to stonewall.” Nor did he expect Dunn to be indicted. “This wasn’t grand larceny,” he told me. “I don’t think she should go to jail. She’s very ill.”

What started out on Dunn’s part as a quest for higher ethical standards led to a lawless, out-of-control investigation and possibly a prison term. She began the investigation at the behest of the board; even Perkins agreed that the leaks had to be stopped. She was urged to keep the investigation in-house. She insisted repeatedly that it be strictly legal and was assured that it met Hewlett-Packard’s high ethical standards. She received legal advice from Baskins and Hunsaker on the legality of pretexting that proved disastrous. She never heard the objections raised by the lower-level investigators and maintains that she doesn’t even remember hearing the word “pretexting.” She emphasized Sonsini’s assertion that, among chairmen of major corporations, not one in ten would have acted any differently.

At the first mention of getting access to directors’ and reporters’ personal phone records, she should have tried to stop the investigation. But the same could be said, even more emphatically, of others connected to the investigation: Hunsaker and Baskins, certainly—both of them lawyers—but also Mark Hurd, who as chief executive was privy to both Kona I and Kona II, attended an early meeting at which phone records were discussed, and was briefed on their progress.

“Mark got the same legal advice I did,” Dunn said. “He got the same memos. We were both victims.” But Hurd remains chairman of Hewlett-Packard, and Dunn faces four felony counts. Dunn worries that she won’t live long enough to defend herself in court. “I care deeply about what people who know me think,” she said. “But, in order to be exonerated, it takes so long. My legacy may be written before that can happen.”

Despite the ongoing investigations, Hewlett-Packard is now thriving financially. Earlier this year, the stock rose above $43, the highest level in six years, and in late January the board disclosed that Hurd had been given an $8.6 million cash bonus and options on five hundred thousand shares of stock. ♦